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Fiscal Schadenfreude?

26 March 2008

 

Forgive my ignorance; I just want to toss an idea or two out there.  This stuff arose while I thought about Mr. McCain’s explanation of his economic policies recently.

Some investments, like standard stocks and mutual funds, pay me handsomely if the businesses in question do well, benefiting all shareholders.  If the boat is rising as a whole, I rise with it, and we’re all profiting from it.  Thus my benefit is tied, proportionally, to the benefit of others.

Other investment tactics – certain hedge funds, and certainly (?) short-selling stocks – are based on the idea that if stocks go down, I make money.  In these cases, my benefit is tied to others’ losses.

Financiers and macroeconomists probably justify the latter investments in that (a) they communicate rapidly to the market concerning companies that are failing to deliver; (b) a free market ought to mean that any conceivable instrument is fair game as long as the investor is willing to bear the associated risk; and (c) such investment pools help to stabilize the economy.  (Please:  feel free to offer more objective justifications for “counterpoint” instruments.)

A couple of contrary thoughts:

 

1.  Those justifications are utilitarian; they have little to no moral or ethical component.

 

2.  The counterpoint, or out-of-phase, instruments may be available to the average investor, but he is not necessarily equipped with the knowledge to invest in them without disproportionate risk.  Nor, as a working stiff, does he normally have the time or resources to learn.  As a practical matter, an average investor can buy into a mutual fund with good assurance and a safe level of diversification, but he can’t do so with the out-of-phase instruments.  As a result, the rich financier can make money when the economy goes north or south, but the average Joe makes money only when the economy goes north.

 

3.  Recent failures in the financial sector suggest that, from time to time, a little instability (in the form of a large-scale business failure) provides a healthy, corrective feedback, bursting bubbles that have been inflating out of proportion to the larger economy – out of proportion to how the rest of us are doing.  Borrowing another metaphor:  to the extent that out-of-phase investment pools smooth out the bumps, they may act toward the economy the way an aspirin acts towards a bacterial infection, obscuring the symptoms that the doctor needs to see in order to prescribe an effective therapy.

 

4.  Last, as a corollary to #2 , I wonder what the NT principle of “rejoice with those who rejoice; mourn with those who mourn” might have to say to those of us who claim to follow Jesus.  Is it appropriate for us to make money off the misery of others, and in proportion to it?  Do our social institutions, words, and acts of compassion speak one thing, while our investment tactics speak something quite the opposite?

I know that I’m oversimplifying some complicated things here.  But is there anything worth considering?

 

qb 

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